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Hedge Fund Behavior of the Ultra-Wealthy

There are different types of hedge funds, and investors who place their funds in hedge funds often take advantage of those differences to increase their return on investment.

Spectrem’s Perspective, Use of Hedge Funds and Private Equity in the Portfolios of the Wealthy, examines the alternative investment behaviors of investors with a net worth of $25 million or more, who are most likely to employ hedge funds and alternatives for portfolio growth.

Overall, 42 percent of investors with a net worth of $25 million or more invest in hedge funds. That percentage increases as wealth increases but decreases as investors get older.

Of those investors who do invest in hedge funds, 34 percent invest in long/short hedge funds, and 29 percent make investments in registered funds or liquid hedge funds. One-quarter of wealthy investors place investments in market neutral hedge funds and 23 percent place funds in event-drive hedge funds.

All of those funds have different rates of return and fluctuate independent of each other. For that reason, most investors place funds in more than one hedge fund, acting as a “hedge’’ against one fund failing to perform up to expectations.

For instance, 19 percent of investors who invest in hedge funds own six or more hedge funds. Only 18 percent have only one hedge fund. A majority of investors who access hedge funds have at least three funds in their portfolio.

While the mean number of hedge funds owned by investors with a net worth over $25 million is four, professionals average more than six funds each, and investors under the age of 55 average 4.6 funds.

Fifty-seven percent of investors under the age of 56 have funds in hedge funds, but that percentage drops to 39 percent of investors between the ages of 56 and 65, and down to 30 percent among investors over the age of 65.